Liquidity Shocks, Systemic Risk, and Market Collapse: Theory and Application to the Market for Perps

Traditional explanations of market crashes rely on the collapse of an asset price bubble or the exacerbation of an information asymmetry sufficient to cause less-informed participants to withdraw from the market. We show that markets can crash even though asset prices have not deviated from fundamental values and information is shared symmetrically among all market participants. We present a model in which markets crash when investors shift their beliefs about the liquidity of the secondary market. While such shifts in liquidity may be a factor in explaining many market crashes, the collapse of the market for perpetual floating-rate notes (perps) provides an especially clear illustration of the theory because a shift in liquidity beliefs appears to have been the sole determinant of the market crash. Such a shift can be precipitated by a systemic liquidity shock that is transitory or permanent. The latter proved to be the case with perps because perceptions of the liquidity of the secondary market were permanently altered. In addition to providing new insights into why markets crash, our findings are particularly relevant for unseasoned financial products that are often priced and marketed on the assumption that liquid secondary markets will develop. The perp episode also highlights the importance of broad placement of securities. Since market liquidity arises endogenously from the diversity of liquidity needs across the investor base, the broader the investor base, the lower the probability of a systemic liquidity shock. We also show how simple modifications in security design can mitigate the impact of such a shock should it occur.

Using Frontier Models to Mitigate Omitted Variable Bias in Hedonic Pricing Models: A Case Study for Air Quality in Bogotá, Colombia

Hedonic pricing models use property value differentials to value changes in environmental quality. If unmeasured quality attributes of residential properties are correlated with an environmental quality measure of interest, conventional methods for estimating implicit prices will be biased. Because many unmeasured quality measures tend to be asymmetrically distributed across properties, it may be possible to mitigate this bias by estimating a heteroskedastic frontier regression model. This approach is demonstrated for a hedonic price function that values air quality in Bogotá, Colombia.hedonic pricing model, omitted variables, air quality, frontier model

Keeping up with the Joneses: An international asset pricing model

We derive an international asset pricing model that assumes local investors have preferences of the type "keeping up with the Joneses." In an international setting investors compare their current wealth with that of their peers who live in the same country. In the process of inferring the country's average wealth, investors incorporate information from the domestic market portfolio. In equilibrium, this gives rise to a multifactor CAPM where, together with the world market price of risk, there exists country-speciffic prices of risk associated with deviations from the country's average wealth level. The model performs signifficantly better, in terms of explaining cross-section of returns, than the international CAPM. Moreover, the results are robust, both for conditional and unconditional tests, to the inclusion of currency risk, macroeconomic sources of risk and the Fama and French HML factor.Consumption externalities, multifactor asset pricing model

A Study of Realtime Summarization Metrics

Unexpected news events, such as natural disasters or other human tragedies, create a large volume of dynamic text data from official news media as well as less formal social media. Automatic real-time text summarization has become an important tool for quickly transforming this overabundance of text into clear, useful information for end-users including affected individuals, crisis responders, and interested third parties. Despite the importance of real-time summarization systems, their evaluation is not well understood as classic methods for text summarization are inappropriate for real-time and streaming conditions. The TREC 2013-2015 Temporal Summarization (TREC-TS) track was one of the first evaluation campaigns to tackle the challenges of real-time summarization evaluation, introducing new metrics, ground-truth generation methodology and dataset. In this paper, we present a study of TREC-TS track evaluation methodology, with the aim of documenting its design, analyzing its effectiveness, as well as identifying improvements and best practices for the evaluation of temporal summarization systems

Using Remote Access for Sharing Experiences in a Machine Design Laboratory

A new Machine Design Laboratory at Marquette University has been created to foster student exploration and promote “hands-on” and “minds-on” learning. Laboratory experiments have been developed to give students practical experiences and expose them to physical hardware, actual tools, and design challenges. Students face a range of real-world tasks: identify and select components, measure parameters (dimensions, speed, force), distinguish between normal and used (worn) components and between proper and abnormal behavior, reverse engineer systems, and justify design choices. The experiments serve to motivate the theory, spark interest, and promote discovery learning in the subject of machine design. This paper presents details of the experiments in the Machine Design Laboratory and then explores the feasibility of sharing some of the experiences with students at other institutions through remote access technologies. The paper proposes steps towards achieving this goal and raises issues to be addressed for a pilot-study offering machine design experiences to students globally who have access to the internet

Physics-based derivation of a formula for the mutual depolarization of two post-like field emitters

Recent analyses of the field enhancement factor (FEF) from multiple emitters have revealed that the depolarization effect is more persistent with respect to the separation between the emitters than originally assumed. It has been shown that, at sufficiently large separations, the fractional reduction of the FEF decays with the inverse cube power of separation, rather than exponentially. The behavior of the fractional reduction of the FEF encompassing both the range of technological interest $0<c/h\lesssim5$ ($c$ being the separation and $h$ is the height of the emitters) and $c\rightarrow\infty$, has not been predicted by the existing formulas in field emission literature, for post-like emitters of any shape. In this letter, we use first principles to derive a simple two-parameter formula for fractional reduction that can be of interest for experimentalists to modeling and interpret the FEF from small clusters of emitters or arrays in small and large separations. For the structures tested, the agreement between numerical and analytical data is $\sim1\%$